§ 3.1 p.m.
§ Lord TREFGARNEMy Lords, I beg to move that the Bill be now read a second time. No one with any knowledge of the aerospace industry can doubt the importance of the proposals before us today. British Aerospace embodies a proud tradition: the names of its distant predecessors (De Havilland, Vickers Armstrong, Hawker, Supermarine, AVRO, Bristol Aeroplane and others) must thrill any listener who, like me, has worked and lived with the sounds and smells of aeroplanes. I list the names of some of the predecessor companies not merely to recall a past tradition, but to make the important point that British Aerospace is the British aircraft industry. It represents the culmination of a process pursued by successive Governments of different political persuasions, to bring together in one organisation the main British aircraft manufacturing capabilities.
The last stage in this process, namely the merging of the airframe manufacturing interests of Hawker Siddeley Aviation and the British Aircraft Corporation, was one of the few desirable effects to flow from the Aircraft and Shipbuilding Industries Act of 1977. There is no doubt that the present strong position of British Aerospace is due to a very considerable extent to the strength of the companies who were the immediate predecessors, but I must, in fairness, say that it is also due to the dedication and skill of the management and workforce of the corporation, who, of course, came largely from the old companies.
14 The present organisation covers military aircraft, civil aircraft, guided weapons, and also the small, but growing, space activities. Furthermore, the range of products which British Aerospace now produce provides a spread of business both commercial and geographical, which helps to protect it against a down-turn in any one of its markets. On the military side, the Harrier, Jaguar, and very soon, the Tornado, provide the main capability upon which the air defence of this country depends, while the Hawk is already training the pilots who will be required to fly these aircraft. In the field of guided weapons, British Aerospace is able to provide our Armed Services with a range of missiles which, like the aircraft, make a very substantial contribution to the NATO Alliance and, thus, to our collective security. Names like Rapier, Seawolf, Skyflash and the Swingfire may have a ring of the Boy's Own Paper about them, but they are in fact a deadly addition— indeed, an essential feature— of our defence posture.
I turn now to the civil side of British Aerospace's business and would touch on their three most important projects, which are at different stages of development. First the HS 125, an executive jet in production since the early 1960s of which nearly 500 have been sold to date, more than half for the North American market. Is it not quite remarkable that this aircraft produced by British Aero-space and one of its predecessor companies, should have achieved such conspicuous success in the most competitive market of all, on the very doorstep of the world's largest aircraft producer? Secondly, I refer to the Airbus, in which Hawker Siddeley was originally only a contractor, but in which British Aerospace is now a full participating member. The A 300 variant has now achieved total orders and options of 275, and the smaller A 310, launched much more recently, 129.
These sales, including especially the recent one to Eastern Airlines, prove what a fine aircraft the Airbus is, and British Airways will, in my personal view, live to rue the day that they bought the Boeing 757 instead. Finally, may I mention BAE's latest civil project, the 146. This aircraft, designed as a replacement for types like the successful Viscount, is expected to fly for the first time early next year and will, I believe, prove a 15 steady source of business for many years to come. It is the first wholly new civil project since the era of the VC 10, the Trident, and the BAC 1– 11 and is, I suppose, the largest airframe project which British Aerospace could be expected to undertake without collaborative partners.
Before coming to the details of the Bill itself, I should like to refer to Concorde. While no one can claim any commercial success for this project, it stands none the less as a striking monument to British and French technical achievement, and indeed all the production aircraft built are now in service either with Air France or British Airways and will doubtless remain so for many years. The technical features of Concorde speak for themselves and while its economics, particularly following the dramatic and unforeseen rises in fuel costs, may leave much to be desired, it has shown none the less, that the skill of European designers and technicians is second to none in the world, and also, most important, that it is possible for collaborative projects, working on the very frontiers of knowledge, to be pushed forward to a successful conclusion. I believe that it is upon that assumption that the success of the major projects of the future will rest, for without that concept no single nation, certainly no single European nation, can hope by itself to find the necessary resources.
The Bill before your Lordships, though short and relatively simple, is quite fundamental in its effect. The prime purpose may easily be described: on a day to be appointed, the whole of the present business of British Aerospace is to be transferred to a new limited company, initially owned entirely by the Government, and in which we intend to sell on an initial flotation about half the shares. My noble friend Lord Cullen of Ashbourne will describe in more detail the arrangements we envisage for this, particularly for employees.
There will of course be many points of continuity between the present statutory corporation and the successor limited company. First, the new company British Aerospace Limited, will be the universal successor to the present enterprise: the whole of the business of the statutory corporation will be transferred to the 16 new company lock, stock and barrel; there will be no dismemberment of the present business into separate parts. Second, there will be complete continuity of employment: all those employed by British Aerospace will continue to be employed by the successor company on the appointed day, and contracts of employment (and their associated pension rights) will pass unchanged— like all other contracts— from British Aerospace to British Aerospace Ltd.
Third, the Government's existing commitments to British Aerospace will of course continue to be honoured as if they had been made to British Aerospace Limited. Thus, the Government's ultimate underwriting of the debts of British Aerospace and its wholly owned subsidiaries transferred to the successor company— but not, of course, the company's new liabilities— will be continued, under Clauses 8 and 9 of the Bill. Where the Government have entered into memoranda of understanding with other Governments in relation to British Aerospace these will be honoured as if no change had occurred; in particular, and perhaps most significant of all, the Government's undertaking in relation to British Aerospace's involvement in the European Airbus project will be fully recognised. In all these important respects, the change from statutory corporation to public limited company will bring about no change. I have stressed these important aspects of continuity because we believe they are important elements in enabling the future company to flourish, since they preserve the vital elements of the present organisation.
The change from statutory corporation to limited company (which lies at the heart of this Bill) is itself only technical. But the effects of that change go far beyond the mere addition of "Limited" to British Aerospace, or the substitution of equity for public dividend capital. They represent a change in outlook and direction which will be pervasive and complete. British Aerospace competes in one of the most fierce of international markets: its success depends upon its ability to respond to the pressures and demands of those markets. Our aim is to ensure that it can do so wholeheartedly and without distraction. In future, British Aerospace Limited will be liable to those pressures — and only those pressures— which apply 17 to any other private sector company. It will have no special position— of favour or of disadvantage— in relation to Government. It will be completely free from the statutory incubus which is unavoidable for a nationalised industry: there will be no place for the special requirements established in law for consultations, or for corporate plans, which hang about the necks of the nationalised industries like chains of office. All these matters will be left to the good sense and judgment of the directors of the new company, as they are throughout the private sector. The successor company will be free to raise its finance on the commercial markets of the world: it will have no special claim on the public purse.
The Government's role in the affairs of British Aerospace Limited will he no different from that in respect of other companies. General schemes, such as those administered under the Industry Act 1972, will be available to British Aerospace Limited as they are to all companies, but it will have no special position. In particular, the new company — unlike the present statutory corporation — will not be precluded from seeking assistance under the Civil Aviation Act 1949 or the Science and Technology Act 1965. Thus the Government will be able to provide aid— including launch aid— if it so desires within the constraints established by the need to restrain public expenditure. Finally, the Government's financial responsibility— subject to the specific arrangements I have mentioned earlier— will be that of any shareholder in a company, and limited to its shareholding. I wish to emphasise that our intention is to create a free-standing company, independent of Government and, by the same token, divorced from automatic Government subsidy. This is an essential departure from the usual practice adopted for a nationalised industry.
The new company will be required, like any other private sector enterprise, to face the consequences of its own decisions. Just as there must be no doubt about the financial independence of the company, so too there must be no doubt as to the responsibility for its management and direction. An essential feature of the Government's policy is to ensure that responsibility for this key industry lies in the hands of those who work in it. We 18 shall not intervene in the commercial administration of the company. As the sole shareholders for a transitional period, we shall appoint the first board of the company. But thereafter we do not expect to have to use the voting rights associated with our shareholding in opposition to a majority of the board of directors.
The policy I have described places great weight on the shoulders of these directors. They will be subject to the normal retirement by rotation and re-election by shareholders at general meetings. The Government have made clear that we intend to secure continuity in management at the level of director, as at other levels, by offering appointment as directors in the new company to those who serve on the hoard of British Aerospace on the appointed day. We hope that all the present board of British Aerospace, except for the present chairman, the noble Lord, Lord Beswick, who has indicated that he does not wish to continue, will serve on the board of the new company. As already announced Dr. Pearce, at present a non-executive board member, will be the new chairman. My Lords, we are fortunate in having such a powerful, experienced and able board in British Aerospace. It would be wrong for me to allow this opportunity to pass without paying tribute to them for the work they have done, and I do so gladly.
I want to say a word about the noble Lord, Lord Beswick, who has been the chairman of British Aerospace through-out the two years or so of its existence. The noble Lord's appointment was not without its critics, but I was not among them. I believe that he has guided British Aerospace during this difficult period with skill and dedication. The noble Lord must have known, or anyway guessed, that a Conservative Government would reinject some measure at least of private ownership into British Aerospace, which no doubt he regrets, but it is my duty to record that the noble Lord has none the less served both British Aerospace and the Government with total loyalty, and we wish to express our gratitude to him.
Turning again to the future, the board will be further strengthened by a special provision to be included in the articles of association of British Aerospace Limited to give the Government the power to appoint two part-time non-executive 19 directors. This power will be used to ensure that these directors, who will be chosen for their financial, commercial or industrial experience outside the aerospace industry, will add a further width of vision and experience to the board. Their duties will be to the company as a whole, not to the particular shareholder to whom their appointment is due. To prevent any conflict of interest, they will be precluded from voting on contracts with the Government. Otherwise, they will be free to act as any other director. The new company's articles will also require all the directors to be United Kingdom citizens. This is part of our determination to ensure that British Aerospace Limited, which is of such importance to the nation's defence, shall remain in British hands. My noble friend Lord Cullen will expand on the measures, largely in the articles of association of the new company but extending beyond them, which we are taking to make sure that British control continues.
My Lords, I have described at some length the policy which lies behind this Bill, and the effects that will flow from it. I hope your Lordships will allow me a moment more to describe briefly the details of the Bill itself. Clause I provides for the whole of British Aerospace's business to vest in one successor company on a day to he appointed by order. Clause 2 provides for British Aerospace's liability to the Government in respect of commencing capital and public dividend capital to be extinguished. Clause 3 provides for shares in the successor company to be issued or allotted to the Secretary of State. The effect of this is that the Government's present investment in British Aerospace will be exchanged for shares in the successor company, which on the appointed day will be entirely owned by the Crown.
Clause 4 is a technical provision pro-viding, if the company's capital is smaller than the former Government investment in the corporation, that the balance is to be carried to a special reserve, called the "statutory reserve ", with limited use only. Clause 5 gives the Secretary of State the right to acquire ordinary voting shares or any other form of security which may be converted into ordinary voting shares. These shares may be held by nominees, by virtue of Clause 6. These powers are 20 subject to the target investment limit established under Clause 7, which must initially be set at the proportionate shareholding retained by the Government after the offer for sale of shares. This limit may subsequently be reduced, but not increased. The Government shareholding must not exceed the limit in force at any time. It may help noble Lords if I say that this power can most easily be thought of as a downward ratchet, setting an upper limit on the Government shareholding in the company. In other words, this Bill provides only for the disposal of shares in British Aerospace Limited, not their acquisition.
Clauses 8 and 9 I have already explained: they give effect to the principle that the Government will stand behind the obligations of British Aerospace and its wholly-owned subsidiaries which vest in the successor company. Clause 10 makes provisions for the eventual dissolution of British Aerospace by order, for the transitional period, and provides for certain provisions of the Aircraft and Shipbuilding Industries Act 1977 to cease to apply from the appointed day. Clauses 11 to 15 contain supplementary provisions, of which the most important is Clause 12, which provides that the successor company is to succeed to the tax position of British Aerospace. This ensures that the new company will suffer no tax disadvantage purely as a result of vesting.
My Lords, I believe that if British Aerospace were to remain in the public sector it would not be long before all the disincentives and disadvantages of nationalisation would be hanging round its neck like an albatross. What future could there be for all the people working in British Aerospace if we had to compare its performance with the most famous failures of our public sector? The flexible formula we have devised for the future ownership of British Aerospace Limited without the shackles of Government control means simply this: that, provided the new company can continue to produce the right products at the right time, and at the right price, then the world will heat a path to their door. I beg to move.
§ Moved, That the Bill he read 2a. — (Lord Trefgarne.)
§ 3.24 p.m.
§ Lord PONSONBY of SHULBREDEMy Lords, many Bills have been brought 21 before the House during the current Session. We find ourselves in agreement with many parts of those Bills and believe that many of them are for a good public purpose. However, for the life of me, I am unable to understand the good public purpose of this particular Bill. In my view it is one of the most unnecessary Bills which has been brought before the House this Session. As far as I can see, it serves no good public purpose other than satisfying the Government's ideological aspirations.
Even the Secretary of State in moving the Second Reading in another place made it clear that he had no criticism whatsoever to make of British Aerospace. Indeed, the noble Lord, Lord Trefgarne, repeated that view this afternoon. I would pause for a moment and join with the noble Lord in the tribute which he paid to the noble Lord, Lord Beswick, for the leadership which he has given to British Aerospace since it was formed.
However, I am bound to ask: Why the Bill? It is, of course, because the Government do not believe that nationalisation is the right framework for so intensely competitive an industry. Personally, I have never believed in change for change's sake. I have believed in change and I have believed in reform when there is some very good reason for it and when there is some need to improve the situation. I can see no reason for it in this instance.
The Bill is succeeding in introducing an element of uncertainty into the industry. It may be said that, with an element of private capital within the industry seeking higher rewards and therefore demanding increased efficiency, the new organisation will do even better. However, if there is some magic about private ownership, one wonders why the Government are not trying it out on British Rail or British Shipbuilders. Is it perhaps because British Aerospace is a profitable industry, and it is only profitable industries which are selected for this treatment?
In 1978 British Aerospace made over £ 60 million. I am told that for 1979 the figure will be in excess of that. I wonder whether the noble Lord can give us the cost of this transaction? Presumably the City firms, the merchant bankers and others who will be responsible for the 22 flotation of 50 per cent. of the company, will need to be paid. No doubt much study has already taken place as regards this matter and I think that the noble Lord, Lord Cullen of Ashbourne, will be giving us details later. Lawyers and accountants will need to be called in. One wonders what will be the cost of all this work. I am told that the cost of this transition could be in the region of £ 3 million, £ 4 million or £ 5 million.
When it comes to the financing of the new company, one wonders whether the cost of raising money for the new company will be less than it is at present. I am told that it would be fair to say that every £ 1 million raised in the open market could involve the new company in finding an extra £ 5,000 or £ 10,000 as a cost for that money, because it would be anticipated that the new company would have to pay something like 0.5 per cent. extra in interest rates over and above what a Government organisation would pay. That is the situation. The cost of flotation will place a heavy burden on the industry, and the cost of running the industry will be higher.
Once the new company has been formed we do not yet know exactly how great a share the Government intend to take in that company. The noble Lord, Lord Trefgarne, repeated the figure "about 50 per cent.". He has refused to be drawn— as his colleagues have refused to be drawn in another place— as to exactly what is meant by that figure. Are we talking about 49 per cent., 50 per cent. or 51 per cent.? We do not know, but I should have thought it was something which should have been written into the Bill.
There is the provision in the Bill— the ratchet situation— under which the level of Government investment can be reduced down and down to 25 per cent. One wonders under what circumstances the other 25 per cent. will be sold off by the Government. Will it be sold off if the company is more profitable, or will it be sold off if the company is less profitable? I would add that the minimum figure of 25 per cent. is not in the Bill. Again, it is an item to be included in the memorandum and articles of association. It is known that it will be there because of an assurance given by Mr. Adam Butler, the Industry 23 Minister, in Committee in another place. Surely the minimum figure should be written into the Bill?
The present wording of Clause 7, despite the assurances given by the Government, would enable the Government to reduce their holding to nil. It does not appear to have been taken sufficiently into account that much of the business of this industry is done with Governments, that a great many of its projects are collaborative projects with other Governments and that there has to be, for such projects, agreement between Governments. That being the case, other Governments will want to know the type of company and organisation with which they are entering into agreements.
When one has a quasi-autonomous Government organisation, such as the new British Aerospace, one can well see that there will be concern by other Governments in entering into negotiations. Certainly a great part of the work of British Aerospace is in the area of defence equipment, and foreign Governments would want to be satisfied of the standing of the organisation from which they were buying. Everybody appears to be in agreement that it would be quite wrong for this important British industry to come under foreign control, but the Government are prepared to see a 15 per cent., stake held by foreigners. One wonders whether they are quite satisfied, and whether that would be the limit.
Noble Lords reading recently about how a group of shareholders were able to establish a very sizeable stake in Consolidated Goldfield, will wonder whether a similar situation could not develop within British Aerospace. Can the foreign shareholding in fact be properly monitored? I think that the House needs to be very clear that such a monitoring operation can in fact be adequately policed. One wonders whether there ought not to be tighter provisions and a lower limit placed on the foreign shareholding. But again, the figure of 15 per cent. is not in the Bill: it is in the memorandum and articles of association.
The Industry Minister, Mr. Butler, has said that the articles will prevent foreign shareholders acquiring more than 15 per cent. of the shares; but, of course, the 24 directors of any company can change their articles of association. The Government have said that they do not wish to exercise control over the company through any of their appointed directors. Recently, for example, British Petroleum changed its articles of association in order to appoint a foreign director. British Aerospace could do the same. However, it has been said that, in fact, this would not be so because a Government shareholding of 25 per cent. could prevent such a change. As I have already said. there is no provision for this in the Bill. This ought to be brought within the Bill and not left to be worked into the articles at a later stage.
It is, indeed, ironic that all this proposed change of control of British Aerospace is happening at a time when other Governments are increasing their involvement in their own aircraft industries. In the United States there are close links between the Government and its aerospace industries, where more than 70 per cent. of production is bought by the Government. In France the major aerospace companies are State-owned. In Germany there is increasing State involvement by increased State shareholding in the aerospace industries.
One of the main motives in bringing the aerospace industry into public owner-ship was in order to ensure the maintenance of an independent aircraft manufacturing capacity in this country. We are still the only country in Western Europe with a complete airframe and engine industry.
On the dynamics side of the industry, British Aerospace produces a larger range of tactical, defensive missile systems than any other manufacturer in the United States or Europe, and this was very fully detailed by the noble Lord, Lord Trefgarne. Under the Bill there is no guarantee that this would stay within the company. There is nothing to stop the sale of a share in the company by the successor company, although we have had an assurance this afternoon from the noble Lord, Lord Trefgarne, that there will be no dismemberment of the company. Again, one would have thought that this should be included in the Bill.
Basically, this is an enabling Bill. The real decisions on it will come later when the memorandum and articles of association of the company are approved.
25 I believe that your Lordships' House should ensure that much of this detail finds a place in the Bill. By tradition we shall give this Bill a Second Reading today, but I do not think it deserves one.
§ 3.34 p.m.
§ Earl AMHERSTMy Lords, we are all grateful to the Minister for taking us through this Bill, which details the machinery for denationalisation of British Aerospace and for turning it into a commercial company. However, I do not think that the Bill explains— and, with due respect, nor do I think the noble Lord fully explained— just why at this juncture this is necessary, when, according to my information, British Aerospace, a vital and go-ahead organisation, has done and is doing very well. I should like to support what the noble Lord has already said about the noble Lord, Lord Beswick, whose performance has been superb. Is it thought that by taking this action sales of the new company will be increased, its considerable international reputation enhanced and its relations with its foreign partners and business contacts strengthened? If so, how is that to be done? Perhaps the noble Lord, Lord Cullen of Ashbourne, will be able to amplify that.
Again, unless I have misread the Bill, it seems that in the first instance the Secretary of State is to hold all the issued share capital of the new company. I gather that these shares are to be ordinary shares carrying the usual voting powers. The Secretary of State is to fix the nominal value. Later he is empowered to allot— which I suppose means sell— the shares to various people. He is to fix a target for Government participation which he can decrease but not increase. He is also empowered to nominate representatives on the new board.
However, for all those activities the Secretary of State must obtain Treasury consent. From that it would seem that this side of the company's new business and its influence will be under the dead hand of the Treasury. It is for question whether this will encourage such organisations as pension funds, insurance companies and other big investors to invest. In the Bill there is also mention of a special fund, which I confess I do not 26 quite understand, to enable a bonus share issue to be made, which the Bill says is to be available to members of the new company. Does that include the workforce of the new company, irrespective of grades? I can find nothing in the Bill that provides for the offer of ordinary shares to the workpeople of the company. But we on these Benches hope that that is what is intended.
I and my colleagues are strongly of the opinion— and I support what the noble Lord, Lord Ponsonby, has said on this— that the Government's shareholding should not be allowed to fall below 51 per cent., always assuming that a simple majority controls the order of the day, with a corresponding number of Government nominee hoard members so as to prevent any attempt at infiltration by foreign interests, and even foreign Governments, through their nominees, irrespective of what the articles of association may say. We believe that so much of the company's activities make it abundantly clear that such protection is of the utmost importance.
The D and P of such a company cannot be other than costly, with long delays between the time a new project leaves the drawing board and when it becomes saleable. In the meantime the company is liable to require a great deal more money. It is often commercial practice that such an eventuality is covered by what is known as a rights issue, which can involve shareholders and a proportion of their shareholdings. I can find no reference to this in the Bill, but perhaps this is to be included in the articles of association, which I understood were still being printed but which are being spoken about this afternoon. Perhaps the noble Lord, Lord Cullen of Ashbourne, can inform me on this matter.
Finally, we on these Benches consider this whole Bill to he a very considerable experiment. We hope that special provision will be made for all ranks of the workforce of the new company to invest in it if they so wish. We also hope that the company will be free to go about its business without any further political interference. Having said that, we on these Benches will support the Second Reading.